What happened
Shares of athletic retailer Dick's Sporting Goods (DKS 1.43%) fell 17.5% in August, according to data provided by S&P Global Market Intelligence. After financial results for its fiscal second quarter of 2023 were reported, it was down as much as 21% for the month.
Dick's reported Q2 results on Aug. 22. And management lamented a problem plaguing brick-and-mortar retail: inventory shrink. In short, there's inventory that's unaccounted for, and this reduces the company's profit margins. And it's expected to be a problem for at least the rest of the year.
As a result of lower profit margins, Dick's expects to earn between $11.33 per share and $12.13 per share for its fiscal 2023. This means that the stock now trades at about 10 times its forward earnings estimates, which is actually pretty close to normal for this company.
So what
Going into August, investors had substantially higher expectations for earnings per share (EPS) from Dick's. In May, management gave EPS guidance of $12.90 to $13.80. Therefore, guidance is now 6% to 18% lower than it was previously. And with this perspective, the 17.5% drop for Dick's stock doesn't look so extreme -- it's in line with the reduction of EPS guidance.
Over the long term, stocks usually go up and down based on profits, specifically EPS. This is clearly illustrated in the five-year chart for Dick's Sporting Goods stock.
Therefore, with an expectation of lower profits in 2023, it makes sense that Dick's stock fell in August.
Now what
Every Dick's shareholder should be asking whether its EPS can grow in coming years so the stock price can rise. And there are encouraging points to consider here.
Dick's went public more than 20 years ago. And during its tenure as a public company, it has registered net losses only once, for a brief stint during the Great Recession. The company's margins will be challenged this year as it tackles the inventory shrink issue. But things would have to get really bad for it to actually start losing money.
As long as it's making money, expect management for Dick's to be returning some of it to shareholders. Its dividend right now has a forward yield of about 3.5%, so this stock is in the high-yield category. And the company is authorized to buy back $1.2 billion in stock, which could boost EPS further.
In conclusion, Dick's is a slow grower, and it's working through some challenges. But with a reasonable valuation, profits, and a plan to give money back to shareholders, I believe the stock can trend higher over the long term, which should be encouraging after its big drop in August.
